China should buy more gold to diversify its foreign exchange reserves, International Business Daily, a newspaper affiliated with the Ministry of Commerce, reported.

China should increase its gold holdings if the country aspires to “internationalize” its currency, the paper said on its website, citing Meng Qingfa, a researcher at the China Chamber of International Commerce. The 1,054 metric tons of gold reserves are inadequate, compared with the 8,133 tons held by the U.S. and 3,408 tons by Germany, he was cited as saying.

China has $2.6 trillion of foreign-exchange reserves, mostly in dollar assets, Meng said. Such holdings will put China at a disadvantage when the U.S. dollar depreciates, as is inevitable amid a worsening U.S. debt problem, he said.

China and India will continue to drive demand for gold jewelry going into the fourth quarter, Bank of China International Holdings Ltd. said in a report on Sept. 27.

India enters a peak season for weddings and the Diwali festival in October-November and Chinese people typically increase their purchases of gold before the Lunar New Year.

Gold demand in China, the world’s largest producer, already gained in the first half of this year as government measures to cool the property market and falling equities spurred investment, the Shanghai Gold Exchange said July 7.

Gold climbed to a record $1,387.35 an ounce on Oct. 14 as investors sought to protect their wealth amid concerns about the global economic recovery, and is headed for a 10th consecutive annual increase.

Sales of gold products such as bars and coins by China National Gold Group Corp., owner of the country’s largest deposit of the metal, jumped as much as 40 percent in the first half, Song Quanli, deputy party secretary at the company, said July 7.

Gold Output

China’s gold output may rise to 340 tons this year, from 314 tons last year, solidifying the nation’s position as the world’s largest producer, Zhang Fengkui, section chief of the raw materials department at the Ministry of Industry and Information Technology, said on Oct. 16.

To increase physical gold supply, the central bank also said on Aug. 4 that it will “increase the number of commercial banks who are qualified to import and export gold, based on the market demand situation.” The central bank also said it will support overseas investment plans by “large-scale” bullion companies by backing them financially.

Still, the State Administration of Foreign Exchange, which manages the nation’s reserves, said in July that U.S. government debt has the benefits of “relatively good” safety, liquidity, low trading costs and market capacity.

Gold is unlikely to become a major holding in China’s foreign reserves because of the metal’s big price swings and lack of interest payments, SAFE said then.

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To contact the Bloomberg News staffs on this story: Feiwen Rong in Beijing at frong2@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

Source: http://www.bloomberg.com/news/2010-10-27/china-should-buy-more-gold-to-diversify-reserves-ministry-newspaper-says.html